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Cross-border insolvency laws smooth the way

By Callum Reid, Partner

First Published in the NBR 9 April 2009

Frustrations at trying to recover money or assets from insolvent trans-Tasman companies may be alleviated by new legislation adopted in Australia and New Zealand.

Cross-border insolvency occurs where a debtor has assets and/or creditors across two or more countries. The resulting problems can include limited recognition of foreign creditors, limited access by insolvency administrators to foreign assets of an insolvent company, and numerous proceedings taking place against the same debtor in different countries.

Australia and New Zealand have now moved to smooth the way by adopting the Model Law on Cross-Border Insolvency, which aims for better co-operation between domestic and foreign courts.  The legislation covers both personal and corporate insolvency and provides a system for when foreign insolvency proceedings have begun in relation to a debtor with assets in the local country.

In theory, the legislation should lead to quicker and more cost-effective cross-border insolvency administration.  But it remains a technical and complex area of the law.

The cross-border system can be used when, for example, a debtor who operates in both Australia and New Zealand has creditors and assets in both countries. Proceedings can begin in both countries by different creditors.

The system makes it far easier for the respective courts and representatives to co-operate and communicate directly with one another – reducing time and resources involved in determining the debtor’s assets and making arrangements in the interests of the creditors. Interim relief may be granted to protect the debtor’s assets and the creditors’ interests.

Under the new legislation, foreign representatives are entitled to begin local insolvency proceedings. They are also entitled to participate in current actions against the individual or company. This allows the foreign representatives to make submissions about the debtor’s assets and facilitate co-operation with the foreign proceeding. Indeed, foreign creditors are given the same right as local creditors and are not ranked lower due to their status as foreign creditors.

So, for instance, where proceedings start in New Zealand it is still important to apply for the proceeding to be recognised in Australia so as to gain access to the debtor’s assets that are located in Australia.

Nominated courts and authorised local representatives must co-operate as much as possible with foreign courts and foreign representatives. 

For foreign proceedings to be recognised in Australia or New Zealand, a foreign representative must apply to the nominated court. In Australia, it’s the Federal Court for individual or corporate debtors or the Supreme Court of a State of Territory for corporate debtors. New Zealand has the High Court. If the Court decides to recognise the foreign proceedings, they will be classified as either a main or non-main proceeding (depending on where the debtor has the “centre of its main interests”).

When a main proceeding is recognised, there are automatic effects that follow such as a:

• stay of local individual proceedings concerning the debtor’s assets;
• stay of execution against the debtor’s assets; and
• suspension of the debtor’s right to transfer, or dispose of its assets.

Local proceedings may subsequently be brought if the debtor has assets in the local State with the action limited to those local assets.

Once a foreign proceeding (main or non-main) is recognised, relief may be granted where it is necessary to protect the assets of the debtor and the interests of the creditors. This includes a stay of local individual proceedings concerning the debtor’s assets, a stay of execution against the debtor’s assets, and entrusting the administration of the debtor’s assets in the local State to the foreign representative.

Creditors faced with a debtor’s assets in both countries will need to obtain expert legal advice on how best to initiate proceedings under the Model Law, in order to achieve their commercial objectives.

Theory into practice - some trans-Tasman examples

• A debtor has assets in Australia and New Zealand. The debtor’s main interests are in Australia. Proceedings begin in Australia and are recognised in New Zealand (the foreign proceeding). As a foreign main proceeding, there is an automatic effect on recognition with respect to the debtor’s assets in New Zealand and further relief may also be sought. The courts and representatives of each country will co-operate with respect to the proceedings and the debtor’s assets and creditors in each country.
• A debtor has assets and creditors in Australia and New Zealand. The debtor’s main activities are in Australia. Proceedings begin in New Zealand (foreign proceeding) and are recognised in Australia. As a foreign non-main proceeding, there is no automatic effect on recognition. Relief must be sought. Any relief granted will be limited to assets of the debtor located in New Zealand.
• A debtor has assets and creditors in Australia and New Zealand. Its main interests are in New Zealand. Proceedings begin in both countries. The New Zealand proceeding (foreign proceeding) is filed and recognised in Australia after the Australian proceeding has begun. As a foreign main proceeding filed after the local Australian proceeding started, there is no automatic effect on recognition. Any relief granted must be consistent with the Australian proceeding.

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.